December 2016 - Getting Serious About Diversity

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SECONDARY
MARKET
THE LATEST
GSE Shareholders Fight
for Their Day in Court
Billions of dollars in damages are at stake in the Net Worth Sweep case.
T
hree GSE sharehold-
ers have filed a lawsuit
against the Federal
Housing Finance Agency
(FHFA) and the U.S. Department
of Treasury over the sweeping of
GSE profits into Treasury, or the
Net Worth Sweep.
GSE shareholders J. Patrick
Collins, Marcus J. Liotta, and
William H. Hitchcock filed their
complaint in the U.S. District
Court for the Southern District
of Texas, Houston Division,
claiming the Net Worth Sweep is
illegal and not authorized by the
Housing and Economic Recovery
Act (HERA) of 2008. The plain-
tiffs are reportedly seeking billions
of dollars in damages.
"We are pleased to have
brought this important suit,
which aims to stop the largest ex-
propriation of private property in
our nation's history and look for-
ward to having it heard in full,"
said Chad Flores, a Houston-
based attorney representing the
plaintiffs, in an interview with
MReport.
The Net Worth Sweep has
prompted approximately two
dozen lawsuits from sharehold-
ers, which have gained various
degrees of traction in the courts
over the last three years. None of
the lawsuits have been decided in
the shareholders' favor as of yet.
Fannie Mae and Freddie Mac
received a combined $187.5 billion
bailout from taxpayers in 2008 to
remain solvent, after which the
FHFA, which was created out of
the HERA, took the GSEs into
conservatorship in September 2008.
The GSEs returned to profitabil-
ity in 2012, but Treasury amended
the terms of the bailout agreement
in August 2012 to require all of
the GSEs' quarterly profits to be
swept into Treasury in what is
commonly known now as the
Third Amendment. In the original
agreement, the GSEs were required
to pay 10 percent of their dividends
annually to Treasury.
"The Net Worth Sweep has
resulted in a massive and un-
precedented financial windfall
for the federal government at the
expense of the Companies' private
shareholders," the complaint from
Collins, Liotta, and Hitchcock
alleges.
The complaint further points
out that since the fourth quarter
of 2012 (the first fiscal quarter
subject to the Net Worth Sweep)
through Q2 2016, Fannie Mae and
Freddie Mac have generated $195
billion in comprehensive income—
but "rather than using those
profits to prudently build capital
reserves and prepare to exit con-
servatorship, Fannie and Freddie
instead have been forced to pay
$195 billion in 'dividends' to the
federal government under the
Net Worth Sweep—$124 billion
more than the government would
have received under the original
PSPAs (Preferred Stock Purchase
Agreements)."
The plaintiffs continued,
"Adding Net Worth Sweep
dividends to the dividends Fannie
and Freddie had already paid,
Treasury has now recouped a
total of over $250 billion—$63 bil-
lion more than it invested in the
Companies. Yet, according to the
Agencies, the amount of outstand-
ing Government Stock remains
firmly fixed at $189 billion, and
the Agencies continue to insist
that Treasury has the right to all
of Fannie's and Freddie's future
earnings in perpetuity."
Collins, Liotta, and Hitchcock
allege that in August 2012, Treasury
chose to suddenly amend the terms
of the bailout agreement because
they knew of the pending profitabil
-
ity of the GSEs. They also pointed
out that the FHFA's conservatorship
of Fannie Mae and Freddie Mac
was not intended to be permanent.
The conservatorship continues to
this day, more than eight years later,
with no immediate end in sight.
The plaintiffs also contend that
the Net Worth Sweep "blatantly
transgresses the limits Congress
placed on FHFA's and Treasury's
authority. As conservator of Fannie
and Freddie, FHFA is charged
with rehabilitating the Companies
with the goal of returning them
to private control. The Net Worth
Sweep guarantees that this never
can be accomplished."
The FHFA declined to com
-
ment on the complaint from
Collins, Liotta, and Hitchcock.
Treasury did not immediately
respond to a request for comment.
In early October, the non-par
-
tisan Congressional Budget Office
(CBO) issued a report stating that if
Fannie Mae and Freddie Mac were
allowed to retain some of their
profits and build capital, it would
reduce the risk of another taxpayer-
funded bailout. The GSEs' capital
buffer is required to be reduced to
zero by January 1, 2018.
"This (CBO report) makes
perfect sense and serves as a
reminder of the absurdity of the
Net Worth Sweep underway since
2012," according to a blog post from
Investors Unite, a non-profit coali
-
tion of more than 1,100 GSE inves-
tors. "Treasury says the Sweep
was needed to protect taxpayers
from exposure to another bailout
if the market suffered a major
setback. However, with the GSEs'
capital dwindling away, many
experts, including Federal Housing
Finance Agency Director Mel
Watt, have raised the idea that the
Sweep itself exposes taxpayers."